Building on the success of the past 75 years is an exciting challenge for all of us in Bord na Móna. The Group has made significant progress in the past year as it moves towards an organisation which is increasingly less dependent on peat as our principal activity. This move is in line with the Group’s vision, ‘A New Contract With Nature’.
Our new direction will take time to bear fruit but we firmly believe it will deliver a sustainable profitable business for all of our stakeholders. The pillars of our future will be Renewable Energy, Resource Recovery, Environmental products and services supported by the traditional businesses of Fuels and Horticulture. This can only be achieved by delivery of an innovation agenda.
Innovation
Bord na Móna views its commitment to innovation as a competitive advantage. The Group will continue to invest in research and development to improve our products, processes, packaging and distribution systems. The Group will constantly seek ways to leverage the ideas of our suppliers and customers to ensure optimum achievement of results.
In addition to our facility in Newbridge, the Group has a dedicated innovation centre in North Carolina, USA, which showcases our range of air and water treatment technologies to our customers throughout North America.
In the last year, the Group’s innovation agenda has seen some tangible results, these include the following:
| • | Horticulture - the launch of Growise, (a 20% peat-free growing media) in the UK and Irish markets; |
| • | Fuels - the launch of an eco-range of solid fuels including eco-briquettes, eco-firelogs and an eco-chiminea product exclusively developed for B&Q; |
| • | Resource Recovery - the development of a composting plant at our waste technology park in Drehid, Co. Kildare which will process up to 25,000 tonnes of organic waste otherwise destined for landfill; |
| • | Renewable Energy - at the Edenderry power station, Bord na Móna is achieving 7.8% peat displacement with biomass feedstock, significantly reducing the facility’s carbon footprint. The Group aim to increase this to 30% by the end of 2016, and |
| • | Environmental - our patented Mónashell technology now provides air odour solutions for over 500 customers across the globe including locations such as Osaka, Japan, Hong Kong and Australia. |
Business Unit Progress
The challenges facing the Group are significant, particularly in the current economic climate, however the Group is well-positioned to overcome these challenges and to exploit any suitable opportunities. The Group successfully raised $205 million (€146.4 million) through a private debt placement in the US in 2009 and these funds are available to support organic growth and future acquisitions. The businesses all made good progress during the year.
Energy
Planning permission was obtained for the development of a combined cycle gas turbine (CCGT) power plant at Derrygreenagh, Co. Offaly. This facility will produce 600MW of gas fired power.
Planning applications are at an advanced stage for two new wind farms in Mount Lucas, Co. Offaly and Bruckana, Co. Tipperary. These wind farms will produce 120MW of wind energy which, when combined with the further development of the existing site in Oweninny, Co. Mayo, will produce a total wind output of almost 500MW, making Bord na Móna one of the largest wind energy producers on the island. The development of the initial phases of the Oweninny project will be completed through a joint venture and discussions with our partner are nearing completion. When final construction is complete this facility will be the largest wind farm in the country delivering over 370MW of renewable energy.
Bord na Móna has significantly advanced its co-fuelling agenda during the last year. The Edenderry power station now operates with 7.8% of biomass feedstock. We anticipate that this will increase over the coming years as it becomes progressively less dependent on peat as the lead feedstock. A recently completed survey of peat reserves has clarified the availability of peat resources over the coming years and underpins the need for our diversification strategy.
Horticulture
Horticulture has seen a significant improvement in the last year following a major restructuring of the business during 2008/2009 despite a very challenging retail environment in Ireland and the UK. The business continued to trade well with our largest customer, B&Q, and worked with them on developing and launching a new range of compost during the season. The business is progressively working towards a peat-free growing media range and we are constantly improving our sourcing and processing of green compost materials to achieve this. This sits comfortably with our capability and expertise in resource recovery.
Fuels
Fuels performed well again in 2009/2010, with a strong demand for products helped by an extended cold spell. The business supplemented its product range with the launch of eco-products. The business is also testing a new eco-briquette.
Environmental
As part of the restructuring of the business, Environmental was split geographically into North America and Western Europe. The focus in North America is on developing further water treatment solutions for the residential and municipal markets whilst launching air odour solution technologies across the industrial, municipal and commercial markets.
As part of the Western Europe business development plan, the UK operations have been merged into a single premises based in the Bristol area. This brings together our air and water offering providing opportunities for new areas of business and putting us in a position to tackle our growth ambitions in this market.
Resource Recovery
The past year has been challenging for Resource Recovery as waste volumes declined due to the impact of the economic downturn. This has resulted in significant margin pressure in a highly fragmented sector. Despite this, the business continues to invest in recycling and recovery technologies with a view to reducing the amount of waste directed to landfill.
Biodiversity and Land Use
The value of bogs and the potential value of the cutaway bogs in terms of national biodiversity were highlighted in the 2002 National Biodiversity Plan. Bord na Móna sees the development of its biodiversity action plan as a means to further assert the Group’s commitment to raise awareness of the importance of biodiversity in all our lives.
This biodiversity action plan is viewed as an important step in setting out:
| • | the work that has been completed to date within the Bord na Móna bogs; |
| • | the lessons that have been learned already in terms of practical management; |
| • | successes relating to biodiversity enhancement, and |
| • | how the Group will proceed to build and further develop the knowledge required to plan the future of biodiversity within the Bord na Móna bogs. |
As part of our commitment to providing for the continued use of our peatlands, Bord na Móna completed a review including the advice of an international consultant, of our flagship development at Lough Boora Parklands, Co. Offaly. The aim is to provide the midland region with a leading eco-tourist destination. In Abbeyleix, Co. Laois, the Group is partnering with the community in restoring and conserving the local peatland for educational and amenity use.
Pensions Reform
The process of reforming the Group’s pension arrangements continued during the financial year under review. It became necessary to reconsider the collective agreement on pensions reform of January 2008. The funding difficulties existing at the time of the agreement have worsened due to the global economic conditions that followed, and resulted in the provisions of the agreement being inadequate and financially impossible to implement.
New Reforms for RWESS
The main focus of change in 2009 was on the Group’s RWESS defined benefit scheme, which covers the majority of Bord na Móna’s workforce. A new collective agreement was entered into in November 2009, the terms of which are set out below, and were approved by the Board and shareholders with effect from 1 January 2010.
1. Funding the Scheme Deficit
In order to address the funding deficit in the RWESS, active members will increase the contribution rate on their pensionable salary by an additional 1.5% and the Group will match the member contributions. This proposed funding is subject to an annual review at the scheme year end and will cease when the minimum funding standard coverage for the RWESS inclusive of the cost of the improved pension benefit is at, or exceeds, 110%.
2. Limiting Future Risks
The Group established a Defined Contribution (DC) Scheme and closed the RWESS to new members from 1 January 2010.
3. Improved Pension Benefit for Lower Paid Workers
To protect the benefit of certain lower paid members of this contributory scheme, a revised pension calculation will be applied to those members whose pension after 40 years of service would otherwise be less than 20% of their pensionable pay on retirement.
In light of the funding deficit in the RWESS, and the increased employee and employer contributions outlined above, the Group has committed to fund the additional cost of this initiative by way of an annual capital payment which will fall due over a period of no more than twelve years. This proposed funding is subject to an annual review at the scheme year end and will cease when the minimum funding standard coverage for the RWESS inclusive of the cost of the improved pension benefit is at, or exceeds, 110%.
4. Merged Schemes
The Group continues to believe that a merger of the RWESS and the other main defined benefit scheme, the GESS would be advantageous to the members. While this merger is not being effected immediately, the RWESS agreement allows for potential future transfers in of GESS members. Actual transfers will not take place pending reform of the GESS arrangements, discussions about which are ongoing.
Operational and Financial Review
The Group’s businesses achieved an improved EBITDA performance in the financial year 2010 in comparison to 2009, however when once-off1 costs for 2009 are taken into consideration, the operating profit of €23.0 million was below the previous year’s performance. The operating profit was impacted by the poor summer weather for peat harvesting, stock losses incurred in the November floods, the effect of the economic slowdown on the demand for some products and services and an impairment of goodwill.
The main financial features for the year were:
| • | Turnover of €384.4 million down 4.3% on the previous year (€401.6 million); |
| • | Earnings before interest, taxation, depreciation and amortisation (EBITDA) of €64.6 million reflects an increase of 12.8% on the 2008/2009 figure. However, the previous year included once-off1 costs of €12.9 million. EBITDA performance in 2009/2010 was adversely impacted by: |
| - a weather restricted peat harvest resulting in a 25% shortfall on the annual target; | |
| - stock losses incurred in the November floods; | |
| - difficult operational issues with poor peatland conditions; | |
| - increased competition in the resource recovery sector, and | |
| - reduced sales activity in the environmental sector due to the economic slowdown. |
1 Redundancy and restructuring and share based payments
EBITDA performance in 2009/2010 was favourably impacted by:
| - Strong demand for solid fuel products, enhanced by a prolonged cold winter; | |
| - Strong peat sales for power generation with good plant availability at all peat fired stations; | |
| • | Profit before tax of €12.9 million was €6.6 million down on the previous year, impacted by higher finance charges of €10.1 million, an increase of €5.8 million on 2008/2009; |
| • | Profit after tax of €10.5 million compared with €15.5 million in 2008/2009; |
| • | In 2009/2010 gross operating cash flow before working capital movements at €60.3 million was €0.9 million down on the previous year. The working capital requirements of the Group decreased by €5.3 million, which when combined with operating cash flow resulted in a net cash inflow from operating activities of €65.6 million, down €27.8 million on the previous year. The significant cash outflows which resulted in a total cash outflow of €66.7 million for the year were: |
| - Net capital expenditure of €49.8 million; | |
| - Interest payments of €10.9 million and | |
| - Dividend payment of €5.3 million. | |
| • | The net cash outflow before financing for the year was €1.1 million compared to a net cash inflow of €40.2 million for 2008/2009; |
| • | The Group had net borrowings of €57.1 million at March 2010, compared to €56.0 million at March 2009. |
Summary of the key Group financial results for the past three years
| 2009/2010 €’000 |
2008/2009 €’000 |
2007/2008 €’000 |
|
| Turnover | 384,417 | 401,567 | 371,226 |
| % change | -4.3 | +8.2 | +24.1 |
| EBITDA | 64,611 | 57,256 | 52,080 |
| % change | +12.8 | +9.9 | +14.7 |
| Profit before tax | 12,899 | 19,520 | 19,825 |
| % change | -33.9 | -1.5 | -32.1 |
| Shareholders’ funds | 224,408 | 198,558 | 234,200 |
| % change | +13.0 | -15.2 | -0.5 |
The Group’s strategy requires that it continues to extract maximum value from longstanding businesses supplying peat for Energy, Fuels and Horticulture products. The Group continues to pursue this by achieving improved efficiency and investing in enhancement opportunities where appropriate. The newer business areas continue to develop as the Group’s strategy is being deployed. The key developments during the financial year in each of the business areas are detailed within this review.
Investment for the Future
Capital Expenditure for 2009/2010 amounted to €56.1 million (€30.5 million in 2008/2009). A significant capital investment programme was undertaken during the year, which included the construction of peaking plants at Edenderry Power, phase 3 of the Drehid engineered landfill, additional refuse collection vehicles, the processing plant at the material recovery centres and replacement of peat harvesting plant.
Research and Development: In 2009/2010 Bord na Móna spent €5.2 million on research and development including business development, exclusive of grants (compared with €5.9 million in 2008/2009). Project work undertaken in this area is outlined in the business review section. Thirty people are directly employed in the Innovation Centre with a further twenty innovation staff embedded in the operational sections of the Group.
Funds from Operating Activities
The Group generated €65.6 million from operating activities in 2009/2010 compared to €93.4 million in the previous year.
| 2009/2010 € million |
2008/2009 € million |
|
| Net cash flow from operating activities | 65.6 | 93.4 |
| Capital expenditure and acquisitions | (49.8) | (34.3) |
| Financing costs paid | (10.9) | (4.4) |
| Corporation tax paid | (0.7) | (1.6) |
| Dividend paid | (5.3) | (12.9) |
| (Decrease) / increase in net cash | (1.1) | 40.2 |
At year end, the Group had net borrowings of €57.1 million, an increase of €1.1 million in the year – a significant achievement given the level of capital expenditure. The Group’s balance sheet remains strong. The detailed cash flow statement is given on page 39 supported by Note 21 to the Financial Statements.
Capital Structure and Treasury Policy
Net borrowings reached a peak of €100 million during the year compared with a peak of €97 million in the previous year. Bank interest and similar charges at €7.9 million compared with €3.9 million in the previous year are a reflection of the additional gross borrowings raised by the Group during the year. The Group had a very successful private placement of debt in the US which raised $205 million (€146.4 million) in August 2009.
Treasury Policy for the Group is approved by the Board and implemented and monitored by the Group Treasury function. The Board’s policy is to minimise funding costs while maintaining flexibility in volatile markets, always subject to acceptable levels of treasury risk. Year-end debt was mainly at fixed interest rates. Exposure in relation to foreign currency investments is hedged as far as possible by borrowings in the same currency as the underlying net assets.
At year end, the Group had $355 million (€263.9 million) fixed rate debt raised on the US private placement debt market. In order to hedge the associated US dollar exchange rate exposures and convert the underlying interest rates to fixed, the Group entered into a number of cross currency swaps to match the maturity profile of the debt.
The maturity profile of debt at year-end was 7% repayable in June 2013, 16% repayable in August 2014, 25% repayable in 2016, 12% repayable in 2017, 19% repayable in 2018 and 21% repayable in 2019.
The Group nets foreign currency cash flows to minimise overall exposure and has adopted a selective hedging approach in managing this exposure to secure the Euro value of receivables and payables.
Gearing was 25% at year end compared to 28% at the start of the year and the level of net debt increased slightly from €56.0 million at the start of the year to €57.1 million at the end of the year.
Reorganisation of Business Structure
Being competitive is more relevant now than ever in business. As a small island economy, Ireland faces additional challenges. The increased presence of international competitors has added to market pressure domestically. Success in developing export market opportunities will be determined by the Group’s ability to remain competitive and to develop strong and lasting customer engagement. As part of delivering on this agenda, Bord na Móna did not implement any pay increases during the year.
Additionally, the Group has realigned its organisation structure to be more customer-oriented. The Energy business unit has been split into Power Generation (Powergen) and Feedstock Supply. Environmental, which was organised along product lines, is now geographically market-focused (North America and Western Europe). The Group is completing a route-to-market analysis of the Fuels and Horticulture businesses to maximise the synergies and customer opportunities. In addition to its long-standing commitment to innovation, the Group has added significantly to its marketing capability to ensure that all its development opportunities are grounded in customer and market insight.
The Group believes that these actions will ensure the growth of the organisation into the future, building on the success of the previous 75 years of innovation and customer service that have been the hallmark of Bord na Móna.
Gabriel D’Arcy
Managing Director
1 July 2010